Valuation of Financial Instruments, business and finance homework help

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After
engaging in a dialogue with your colleagues on valuation, you will now be given
an opportunity to apply principles that were presented in this phase. Using a
Web site that provides current stock and bond pricing and yield information,
complete and analyze the tables illustrated below. Your mentor suggests using a
Web site similar to this one.

To fill out the first
table, you will need to select 3 bonds with maturities between 10 and 20 years
with bond ratings of “A to AAA,” “B to BBB” and “C to
CC” (you may want to use bond screener at the Web site linked
above). All of these bonds will have these values (future values) of
$1,000. You will need to use a coupon rate of the bond times the face value to
calculate the annual coupon payment. You should subtract the maturity date from
the current year to determine the time to maturity. The Web site should provide
you with the yield to maturity and the current quote for the bond. (Be sure to
multiply the bond quote by 10 to get the current market value.) You will then
need to indicate whether the bond is currently trading at a discount, premium,
or par.

Bond

Company/
Rating

Face Value (FV)

Coupon Rate

Annual Payment (PMT)

Time-to Maturity
(NPER)

Yield-to-Maturity
(RATE)

Market Value (Quote)

Discount, Premium,
Par

A-Rated

$1,000

B-Rated

$1,000

C-Rated

$1,000

  • Explain the relationship observed between
    ratings and yield to maturity.

  • Explain why the coupon rate and the yield
    to maturity determine why the bonds would trade at a discount, premium, or par.

  • Based on the material you learn in this
    Phase, what would you expect to happen to the yield to maturity and market
    value of the bonds if the time to maturity was increased or decreased by 5
    years?

    In
    this step, you have been asked to visit a credible Web site that provides detailed
    information on publicly traded stocks and select 1 that has at least a 5-year
    history of paying dividends and 2 of its closest competitors.

    To fill up the first table, you will need
    to gather information needed to calculate the required rate of return for each
    of the 3 stocks. You will need to calculate the risk-free rate for this
    assignment. You will need the market return (thatis just the return on the
    S&P, and it is easily found online), and the beta that you
    should be able to find on the Web site.

Company

5-year Risk-Free
Rate of Return

Beta (β)

5-Year Return on Top
500 Stocks

Required Rate of
Return (CAPM)

To complete the next
table, you will need the most recent dividends paid over the past year for each
stock, expected growth rate for the stocks, and the required rate of return you
calculated in the previous table. You will also need to compare your results
with the current value of each stock and determine whether the model suggests
that they are over- or underpriced.

Company

Current Dividend

Projected Growth
Rate (next year)

Required Rate of
Return (CAPM)

Estimated Stock
Price (Gordon Model)

Current Stock Price

Over/Under Priced

In the third table, you
will be using the price to earnings ratio (P/E) along with the average expected
earnings per share provided by the Web site. You will also need to compare your
results with the current value of each stock to determine whether or not the
model suggests that the stocks are over- or underpriced.

Company

Estimated Earning
(next year)

P/E Ratio

Estimated Stock
Price (P/E)

Current Stock Price

Over/Under Priced

After
completing the 3 tables, explain your findings and why your calculations
coincide with the principles related to bonds that were presented in the Phase.
Be sure to address the following:

  • Explain the relationship observed between
    the required rate of return, growth rate and the dividend paid, and the
    estimated value of the stock using the Gordon Model.

  • Explain the value and weaknesses of the
    Gordon model.

  • Explain the how the price-to-earnings model
    is used to estimate the value of the stocks.

  • Explain which of the 2 models seemed to be
    the most accurate in estimating the value of the stocks.

  • Based on the material that you learn in
    this Phase, what would you expect to happen to the value of the stock if the
    growth rate, dividends, required rate of return, or the estimated earnings per
    share were to increase or decrease? Be sure to explain each case separately.

    Note: You can find information
    about the top 500 stocks at this Web site.

    References

    S&P 500 index chart. (2014). Retrieved from
    the Yahoo! Finance Web site:
    http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

    Yahoo! Finance. (n.d.). Retrieved from
    http://finance.yahoo.com/

    Be sure to document your
    paper with in-text citations, credible sources, and a list of references used
    in proper APA format.

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